July 22 (Bloomberg) -- French President Francois Hollande
said he’s prepared to cancel the sale of a second Mistral
helicopter carrier ship to Russia if the European Union decides
to expand its sanctions against Russia.

The second ship, due in 2016, hasn’t yet been paid for,
making it possible to withhold the sale if the EU agrees to
broaden its measures on Russia, Hollande said yesterday at the
annual presidential press dinner.

At the same time, sanctions can’t be retroactive and
wouldn’t cover delivery of the Vladivostok, the first Mistral
warship, which is already paid for and due for delivery in
October, Hollande said.

“Can the rest of the contract be honored?” Hollande told
reporters in Paris about the second warship part of a contract
with Russia. “That will depend on Russia’s attitude.”

EU foreign ministers are meeting today in Brussels to
consider further sanctions punishing Russia in light of evidence
that separatists in eastern Ukraine shot down a Malaysian
airliner last week with 298 passengers on board. The sanctions
described by Hollande would need to be decided at the level of
national leaders, so no such decision would come today.

The U.S. and European countries have pressured France to
delay or cancel the delivery of the Mistral ships after Russian
annexed the Crimea and was accused of fomenting separatist
uprisings in eastern Ukraine.

Company Sanctions

“With so many European Union citizens lost in the
Malaysian Airlines crash, it is hard to see how the French
Mistral deal can go ahead,” Timothy Ash, head of emerging
markets research at Standard Bank Plc in London, said in an e-mail before Hollande made his remarks. “The British seem
prepared to stomach enhanced financial sector sanctions, which
the French had argued that they had to see before pulling the
Mistral deal.”

The EU has already imposed what are known as Level 2
sanctions, which target specific persons and companies, because
of Russian support for Ukrainian separatists.

A further step -- which has been the source of dispute
within the EU -- would be Level 3 sanctions that apply to entire
economic sectors such as the defense, banking and energy
industries. While hitting Russia harder, those measures would
also have a greater cost to the European nations.

The Mistral is a 200-meter (656-foot) ship, capable of
carrying as many as 700 combat troops, 16 helicopters and 60
armored vehicles. It is built by state-owned military contractor
DCNS and the shipbuilder STX in Saint-Nazaire, where 400 Russian
sailors arrived last month to train on the Vladivostok.

Russian Deputy Prime Minister Dmitry Rogozin was quoted
yesterday by the Russia’s Itar-Tass news agency as saying that
he doubted France would break the Mistral contract.

“Billions of euros are involved,” he said, according to
the state-owned news agency. “The French are very pragmatic.”

Russia is buying the Mistrals with French equipment,
including combat navigation devices, and will arm them with its
own weaponry, according to Itar-Tass.